Competitive analysis training is what you study in school, right? Most MBA programs include a class or two on competitive analysis. The students may even practice on a case or two if they are lucky and study in a university where the case study method is used extensively. However, the majority of cases treat competitive analysis as an ad hoc effort: each situation is different. The student is not given a framework which he or she can apply to all situations. Worse: Most of the business students do not have the experience to place these cases or theories in real world context. At the ripe age of 26 (average age of MBA in the US) they lack the years in professional or middle management positions where they actually had to use competitor analysis on the job, for real decisions.
The result is that most managers lack really effective competitive analysis training. If they know the theory, they don’t know how to apply it. If they know how to apply it, they find it hard to make it actionable and add value to their bosses. When they come to us at the Fuld-Gilad-Herring Academy of Competitive Intelligence we start them from the basics. At the end, they uniformly say: I did not know it can be that useful when I studied it at school!
Competitive analysis training relies heavily on the analytical frameworks of Michael Porter. Few academics had such an influence on the practices of practitioners. No theory has emerged to replace Porter’s 1980 framework. While most business students are familiar with the five-force and four corner models by Porter, the application of the models is more art than science.
Part of the competitive analysis training at the Academy is to gain a deeper understanding into the real world information requirements for a good competitive analysis of industries and competitors. Both academic programs and corporate cultures place premium of details, lots of them. A good competitive analysis places premium on insights. Insights are tough – they require a lot of effort in ignoring noise and focusing on essentials. Though the term "insight" has been cheapened through ages of advertizing/marketing agencies’ hype, it still means a "whole which is more than the parts". So competitive analysis which just sums up rims and rims of a competitor’s details – its strategy, capabilities, market share, and so on, has no chance of actually adding value to decision makers. The overuse of "competitor profiles" for one is an example of such waste of paper (or virtual space if the profile is on a database).
The only serious addition to Porter’s seminal work has been some supporting evidence of managerial biases coming out of brain neurological research since the 80s. The way human beings behave reflects the outcome of two - at times competing - brain activities: Cognition and affect.
Deliberate cognitive activities control rational thinking, such as calculations of economic value added (EVA) of projects. Automatic affective activities apply where affects (e.g., feelings and moods) automatically create impressions based on memory and drives’ states. Each processing can be traced roughly to different areas in the brain. Behavior results from the interaction of the four activities, interaction which includes collaboration and at time competition for the scarce resource of attention. Automatic processes are always active, underneath our consciousness. Higher order controlled processes may, or may not, intervene to correct or override automatic processes. The following example can serve as a rough approximation to this overall process.
The new research adds two important dimensions to Porter’s Four Corners’ model. First, it is clear that when making predictions about a company’s moves, one needs to take into account implicit factors, corresponding to human automatic information processes. Just as observed human behavior can not be explained or predicted based on deliberate, controlled reasoning alone, companies’ behavior can not be explained by rational financial reasoning alone. Porter understood that well: his revolutionary insistence on accounting for culture, history, executive, consultants, and board’s backgrounds, goals, values and commitments and his inclusion of management deep beliefs and assumptions about what works or does not work in the market are clearly in line with the effect of underlying "automatic" or implicit factors on companies’ future behavior. Alas, despite Porter’s apparent popularity, the vast majority of executives and analysts stick to the easy to get observed behavior as the sole basis to thinking about competition. The disproportionate emphasis put on financial intelligence, for example, (competitors’ P&L and balance sheets) reveals a methodical lack of understanding of what truly predicts competitors’ moves. In war games, those managers who rely heavily on financial or econometric modeling to predict corporate moves tend to be the poorest forecasters.
The second contribution of the new research to Porter’s model is more subtle, and depends on your belief regarding decision making in corporations. A company is a collective of many individuals but it behaves according to the whims and vagaries of just a few decision makers: the CEO, in the case of a corporation, the division or SBU’s president in the case of business units and possibly one or two additional "inner circle" executives or advisors (such as a trusted investment banker or senior partner in a consulting firm). The decisions of these powerful individuals at the end are subject to the influences of affective and automatic processes described by neuroscientists. Bossidy and Charan, two experienced business leaders, claim in their book, "Confronting Reality" (Crown Publishing, 2004) that the majority of powerful decision makers misread reality and doom good research and careful decision processes. Even if we discount the claim as hype meant to sell another business best seller, these executives are human, and despite the temptation to view corporate decisions as rational and economic-based, the truth is their decisions reflect a lot more personal effect than most analysts realize. Angry executives take more risks, emotional executive make rush judgments, and biased executives use rationalization to explain decisions which were actually driven by affective factors, such as their past history or attention biases to which they have no introspective access. Can you otherwise explain the decision of Gerald Levine to sell Time-Warner to AOL for peanuts? The out-of-control empire building of Jean Paul Messier of Vivendi which brought the proud company to its knees? The decision of Juergen Schrempp, the powerful Chairman and CEO of Daimler, to buy Chrysler for a price that proved 100% too much?
Good competitive analysis training (and naturally we think ours meets this standard) must prepare the trainees to the realities of corporate life. Analysis is used in corporations to describe any effort that resulted in a report. But not every report with a heading "analysis" is true analysis. Analysis must explain complex phenomena with a few simple variables, so by design it is not details oriented. Moreover, quite often, what is required in competitive analysis is not analysis but synthesis – placing disparate facts in context that makes them meaningful beyond the facts alone. Competitive analysis training aims to bring the managers to see the forest from the trees (synthesis) as often as seeing the trees in the forest (analysis).